Deutsche Bank took a 1.2 billion-euro ($1.65 billion)
charge to cover potential legal expenses. UBS shares posted the
biggest decline in more than two years after the Swiss regulator
demanded it hold more capital for litigation risks.

Regulators have taken a tougher stance against misbehavior
since the financial crisis of 2008. Rabobank Groep, the Dutch
cooperative lender, was fined 774 million euros today for its
involvement in rigging benchmark interest rates, the second-largest penalty in the probe so far after UBS. Deutsche Bank is
among firms still under investigation. UBS and Deutsche Bank
also set aside funds in the third quarter for lawsuits tied to
the U.S. housing market and said authorities have requested
information in a probe into the manipulation of currency rates.

“Deutsche Bank is sizing up legal costs while UBS is being
told by its regulator to reflect greater risk, specifically from
known and unknown litigation,” Dieter Hein, a banking analyst
at Fairesearch GmbH in Kronberg, Germany, said by phone.
“Investment banks have yet to get a handle on this, otherwise
they wouldn’t be adding to their reserves quarter after
quarter.”

Lloyds, Nomura

Lloyds Banking Group Plc, Britain’s biggest mortgage
lender, declined 2 percent to 78.01 pence in London after its
third-quarter earnings were also hurt by escalating one-time
items. The London-based bank posted a 1.3 billion-pound ($2.1
billion) loss in the period after setting aside 750 million
pounds more to compensate clients sold payment-protection
insurance that didn’t cover them or that they didn’t need. In
all, the lender has made about 8.1 billion pounds of provisions
for PPI.

On a busy day for bank earnings, Nomura Holdings Inc.
reported that quarterly profit rose less than analysts estimated
as demand for Japanese stocks waned, signaling an earnings boom
stemming from Prime Minister Shinzo Abe’s economic stimulus may
be losing momentum. Net income at Tokyo-based Daiwa Securities
Group Inc. more than quadrupled in the quarter, in line with
analysts’ estimates.

Size ‘Surprising’

At Deutsche Bank, third-quarter net income fell to 41
million euros from 747 million euros a year earlier, the
Frankfurt-based bank said today, missing analysts’ estimates.
Co-Chief Executive Officers Anshu Jain, 50, and Juergen
Fitschen, 65, boosted reserves for legal costs to 4.1 billion
euros in the quarter. The 1.2 billion-euro increase was almost
four times the average estimate of analysts surveyed.

Deutsche Bank’s share price recovery during the course of
the day shows some investors have already factored in legal
costs in their assessment of the stock, said Lutz Roehmeyer, a
money manager at Landesbank Berlin Investment who helps oversee
about 11 billion euros, including Deutsche Bank shares.

“Some Deutsche Bank investors were caught on the wrong
foot with the size of the provisions,” Roehmeyer said from
Berlin today. “Others are saying it was clear settlements would
be coming and it doesn’t make a whole lot of difference whether
the reserves are now 1.2 billion euros higher.”

Regulators are investigating whether more than a dozen
lenders colluded to rig the London interbank offered rate, or
Libor. Including Rabobank, five firms have been fined more than
$3.6 billion for benchmark-rigging.

Forex Probe

Deutsche Bank is trying to put litigation behind it, Chief
Financial Officer Stefan Krause said on a conference call with
analysts. The company is interviewing about 50 employees as it
investigates whether traders tried to rig rates, a person
familiar with the matter said last week. Deutsche Bank has also
said that its own internal probe into Libor indicates no
wrongdoing by current or former management board members.

Investigators are also probing the possible manipulation of
the $5.3 trillion-a-day foreign-exchange market. Bloomberg News
reported in June that traders at some banks said they shared
information about their positions through instant messages,
executed their own trades before client orders and sought to
manipulate the benchmark WM/Reuters rates, which determine what
many pension funds and money managers pay for their foreign
exchange.

Deutsche Bank said it was co-operating with requests for
information from regulators. The lender is the biggest foreign
exchange trader, accounting for 15 percent of the market,
according to a May survey by Euromoney Institutional Investor
Plc. UBS has about 10 percent of the market.

Deutsche Bank also faces probes and lawsuits related to its
origination and sale of mortgage-backed securities. The lawsuits
allege the bank misrepresented the products. It has said that it
is cooperating with regulators.

JPMorgan Chase & Co. agreed last week to pay $5.1 billion
to settle a U.S. regulator’s claims related to home loans and
securities the firm sold to mortgage finance companies Fannie
Mae and Freddie Mac, resolving part of a $13 billion accord the
firm is negotiating with the government. The bank reported its
first quarterly loss under CEO Jamie Dimon, 57, earlier this
month after taking a $7.2 billion charge to cover the cost of
mounting litigation and regulatory probes.

UBS, Switzerland’s biggest bank, said its target to reach a
15 percent return on equity in 2015 will be delayed by at least
a year unless the Swiss regulator lifts an order that UBS hold
more capital.

“There is no single item that we can point to that brought
this decision,” CEO Sergio Ermotti, 53, said in an interview
with Bloomberg Television, referring to the order to increase
capital for operational risks. “It’s a variety of reasons and
it’s a temporary measure. We will work hard to take this add-on
away.”

UBS reported third-quarter net income of 577 million Swiss
francs ($644 million) compared with the 561 million-franc
average estimate of 12 analysts surveyed by Bloomberg. A 222
million-franc tax benefit helped cushion 586 million francs in
provisions for litigation and regulatory matters.

Capital Ratio

The Swiss bank said it’s taking measures against
individuals as it conducts an internal review of its foreign-exchange business. The firm didn’t identify or quantify the
number of employees involved or specify what actions it took.

The Swiss regulator’s demand for more capital is a setback
for Ermotti, who decided to exit most debt-trading businesses at
the investment bank last year to boost returns. The bank, which
paid about 3 billion francs in fines and settlements for
litigation in the past year, said it expects “elevated
charges” for legal and regulatory matters through 2014.

The Swiss Financial Market Supervisory Authority’s demand
adds about 28 billion francs to UBS’s risk-weighted assets and
reduces the Basel III common equity ratio by 130 basis points as
of Oct. 1 from 11.9 percent at the end of September, UBS said.

Finma Demands

Examining the bank’s internal models is one of Finma’s core
tasks and the regulator can impose surcharges if results from
internal models don’t correspond to a conservative assessment of
potential risks or empirical evidence, said Tobias Lux, a
spokesman. He declined to elaborate on the specific demands for
UBS or say whether Finma has made similar demands to Credit
Suisse. A Credit Suisse spokesman, Marc Dosch, declined to
comment.

UBS still expects to be able to boost its Basel III common
equity ratio to more than 13 percent in 2014. The regulator’s
demands for higher risk weightings to be assigned to litigation
and compliance matters will be partially offset by the boost in
capital the bank will get from repurchasing a fund from the
Swiss National Bank.

Reaching that capital target is at top of the bank’s agenda
for next year, Ermotti said. UBS plans to start paying out more
than 50 percent of profits as dividends after it reaches the
capital target.

The bank’s plan to buy back the SNB’s fund, which was used
to wind down UBS’s toxic assets from the subprime crisis, will
add 100 basis points to the capital ratio, more than the company
previously estimated, as the fund’s assets have shrunk to 1
million francs. A basis point is equivalent to one hundredth of
a percentage point.